UK: SMALL BUSINESSES THAT ARE TOO BIG AND IMPORTANT TO IGNORE. - The financial framework of the small business sector is, says Roger Eglin, surprisingly strong.

Last Updated: 31 Aug 2010

The financial framework of the small business sector is, says Roger Eglin, surprisingly strong.

French prime minister Edouard Balladur struck an amazing concordat late last year with France's small entrepreneurs. He agreed to extend tax breaks for people placing their savings in special bank accounts to be used to finance cheap loans for small firms. In return for making what could be an extra Fr10 billion in subsidised loans available this way, the federation of small firms has promised that its members would try to create jobs for 200,000 young people.

Kenneth Clarke's first Budget last autumn had nothing quite so spectacular to offer Britain's small business sector. In fact it confirmed the end of the Business Expansion Scheme, an initially promising attempt to use tax incentives to stimulate small business expansion that went off the rails. But he did propose some welcome measures ranging from schemes to encourage business angels to small business tax reliefs.

Their impact is still uncertain and will take time to build up. But they are positive measures nonetheless and a measure of hope for an important part of the economy which has taken a battering. The recession was generally agreed to be the toughest ever to hit small firms. They collapsed in their thousands and the banks lost hundreds of millions, leaving relations between the two at an all-time low (see also Capital Ways for Business, p72. Of the 128,000 companies incorporated in 1987, according to the NatWest Small Business Trends review, almost all survived to 1989 but nearly half had failed by 1993. There has been progress though: the country now has one million more small businesses than in 1979.

Against this background, it is easy to forget what a powerful job-creating force small firms were in the 1980s. Nothing can match the sheer scale of the US where new business start-ups generated 12 million jobs in the 1980s. But government estimates suggest small firm expansion in Britain was creating nearly 200,000 jobs a year in the second half of the 1980s - close to Balladur's target for France.

There are some signs of better times. Half of the 1,000 small firms questioned in a recent survey for Grant Thornton International forecast higher profits, and one in three expected to take on more staff. In a survey of 480 chief executives of owner-managed businesses, the accountancy firm, Ernst and Young, found a strongly positive mood. The respondents forecast that sales would grow by an average of 7.3% during this year, three times the growth rate Clarke is forecasting for the economy, and 58% were confident the economy would improve.

There is still a mood of caution: 43% of those surveyed had not seen signs of recovery yet themselves. This fits in with the view of Jane Bradford, head of the NatWest's small firms business, who says the signs are that the recovery is taking time to work its way through from large to small companies. Nevertheless she admits to cautious optimism: 'In my view the worst is over'.

NatWest, which is the market leader in small business finance, with nearly one million customers who have borrowed some £10 billion, is finding a marked improvement in small firms' business skills. The recession's survivors are better managers.

She is hopeful that relationships between bank and customers are becoming less confrontational after the tensions of recent years. Though there have been fears that there might be a shortage of funds for small firms, she does not see a mismatch developing between supply and demand. In fact the financial framework is in better shape than many assume. This was one important inclusion of a recent Bank of England report on small business finance. Research suggests that the average owner is working within his lending limit and that businesses are using savings or cash flow rather than borrowing to invest. Only about half of small businesses, and some 20% of start-ups, borrow and NatWest at the moment has some £4 billion of business savings. Overall the banks are holding some £27 billion in business savings compared to lending of around £43 billion.

Other forms of small business finance pale into insignificance compared to these figures. The venture capital industry makes only just over 1,000 investments in a year though the individual amounts involved are larger. Forms of finance such as factoring have a part to play but the figures emphasise the overwhelming importance of bank lending, a point stressed in the Bank of England report. This in turn highlights the need for good relations between small firms and banks. NatWest is putting 12,000 frontline lending staff through courses to improve their skills while 700 managers are attending business schools. Accountants are being called to help with loan decisions. The aim is to control the risks while improving the quality of service. Other banks are beginning to reassess their strategy. Collectively they know this is a tough market where they can lose money and compromise their image. But it's one that is too important to the economy and their own businesses to neglect.

Roger Eglin is associate business editor of the Sunday Times.

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